The London Metal Exchange (LME) and World Gold Council have just confirmed that their new suite of London-based exchange-traded gold and silver futures contracts will begin trading on Monday 10 July. These futures contracts are collectively known as LMEprecious.
This 10 July 2017 launch is itself over a month behind schedule given that LMEprecious was supposed to be launched on 5 June but was delayed by the LME.
As a reminder, these LMEprecious gold futures and silver futures contracts represent unallocated gold and silver and there is no direct connection in the contracts to physical gold or physical silver, since settlement is via unallocated gold and silver balance transfers across LME Clearing unallocated metal accounts at member banks of London Precious Metals Clearing Limited (LPMCL).
Still, this hasn’t stopped LME from using terminology in the contract specs that attempts to link them by association to real precious metal. For example, the gold contract spec says that the:
“underlying material” is “Loco London Fine Gold held in London and complying with standards relating to good delivery and fineness acceptable to the Precious Metal Clearer of the Clearing House”.
This is similar to how an estate agent (realtor) would describe a house that’s located in a bad area, i.e. that it’s not too far from a good area.
The LME also fails to mention the fact that the LBMA/LPMCL unallocated account system is a fractionally-based paper gold and paper silver trading system, with trading volumes of unallocated gold and unallocated silver that are 100s of times higher than the available physical metal sitting in the London precious metals vaults. Ironically, these gold and silver futures are starting to trade in a month in which the LBMA has still not begun publishing the actual quantities of gold and silver in the LBMA vaults in London, despite promising to.
For both gold and silver, the LME futures contract suite will consist of a daily trade date (T) + 1 contract (T+1), known as TOM, and daily futures from a T + 2 (equivalent to Spot settlement) out to and including all trade dates to T + 25. Beyond this, there are approximately 36 monthly futures contracts covering each month out to 2 calendar years, and then each March, June, September and December out to 60 calendar months (12 more quarters out to 5 years).
All LMEprecious contracts will centrally clear on LME’s clearing platform LME Clear. The contracts can be traded on LME’s electronic trading platform LMESelect between 1am and 8pm London time, and can also be traded 24 hours a day ‘inter-office’ over the blower (voice-based trading). Apart from trading hours differences, the only other difference between LMESelect and phone is that of the daily contracts, only T+1 to T+3 can be traded via LMESelect, while T+1 to T +25 can be traded over the phone.
The LME also plans to roll out options products and calendar spread products based on these futures, but as to when these will appear is not clear.
Banks, Banks and more Banks
The official line is that LMEprecious has been developed by a consortium of the LME, the World Gold Council and a group of investment consisting of Morgan Stanley, ICBC Standard, SocGen, Goldman Sachs and Natixis, as well as prop trading firm OSTC, but to what extent each of the 5 banks and OSTC has had input into the product development and trading rules of LMEprecious is unclear.
On 3 August 2016, the World Gold Council established a UK registered company called ‘EOS Precious Metals Limited’ to house the arrangement between the Council and the aforementioned banks and OTSC. The first director of EOS was Robin Martin, managing director of market infrastructure at the World Gold Council, while the first registered address of EOS was actually the World Gold Council’s London office at 10 Old Bailey in the City of London.
A slew of other directors were then appointed to EOS Precious Metals Ltd on 9 November 2016, namely:
Aram Shishmanian, CEO of World Gold Council
Raj Kumar – ICBC Standard Bank (formerly of Deutsche Bank and formerly a director of London Precious Metals Clearing Limited (LPMCL)
Bradley Duncan – ICBC Standard Bank (resigned as director March 2017 and replaced by Richard England)
Francois Combes – SocGen (formerly a director of London Gold Market Fixing Limited)
Vinvent Domien – SocGen (formerly a director of London Gold Market Fixing Limited)
Matthew Alfieri – Goldman Sachs (resigned May 2017 and replaced by Donald Casturo)
David Besancon – Natixis
Bogdan Gogu – Morgan Stanley
Hanita Amin – Morgan Stanley
Jonathan Aucamp – Exec chairman of OSTC
Some of these directors, as you can see above, are very much connected to the existing and previous mechanisms of the London Gold Market, eg, LPMCL and the old London Gold Fixing.
But apart from ICBC Standard Bank, suspiciously absent from the list of banks cooperating with the LME and World Gold Council are the big guns of the LBMA and LPMCl members, i.e. HSBC, JP Morgan, UBS, Scotia, all of which are big players in the London gold and silver markets and vaulting scenes in London, New York, and in UBS’s case Zurich. As they control LPMCL, perhaps there is no need for them to be involved in a gold and silvers futures sideshow.
Peter Drabwell of HSBC was re-elected to the Board
Sid Tipples, of JP Morgan was re-elected to the Board
Raj Kumar of ICBC Standard (formerly of Deutsche Bank) was elected to the Board
Kumar replaces Steven Lowe of Scotia who had been on LBMA board Vice-Chairman
When EOS Precious Metals Ltd was established, it only had 1 A share and 1 B share, both held by WGC (UK) Limited. In the incorporation documents, A shares were defined as having voting rights, an ability to appoint a director and a board observer but no rights to dividends. B shares were defined as having no voting rights but with an entitlement to dividends.
On 26 October, a further 999 A shares and 699 B shares were allotted and said to be paid-up. In the in the allotment filing, these B shares are listed in various tranches i.e. 400 B shares, 100 B Shares, 100 B shares, and 99 B shares, with different total amounts paid for each of these tranches.
In total, there are now 1000 A shares and 700 B shares issued in EOS (with a nominal value of US$ 0.10 each), but there is nothing in the filings listing how many shares of each class are owned by each of the companies and banks that have director representation. Given that there are 6 trading entities as well as the World Gold Council, it could be that each of the 7 entities holds 100 B shares.
There are currently also 10 directors on the EOS board, 2 each from the World Gold Council, SocGen, ICBC Standard, and Morgan Stanley, and 1 each from Goldman Sachs and Natixis. Therefore, its possible that the 1000 A shares could be divided out in the same ratio, 200 for each of the World Gold Council, SocGen, ICBC Standard, and Morgan Stanley, and 100 shares each for Goldman and Natixis.
In a related development, on 23 February 2017 Reuters reported that the LME had agreed a 50-50 revenue sharing agreement with EOS precious Metals under which Morgan Stanley, ICBC Standard, SocGen, Goldman, Natixis and OSTC will attempt to generate trading certain volumes (liquidity) in the LMEprecious gold and silver contracts in return for 50% of the LME’s revenue on the products. The terms of this agreement are not public and it’s unclear if the performance of the banks and OSTC will be measured on customer flow or liquidity guarantees, or perhaps some type of credibility measurement of the contracts in the marketplace.
In early March, Reuters also reported that 3 additional banks and a broker had agreed to come on board with LMEprecious as clearing members, specifically, Commerzbank,Bank of China International,Macquarie Bank, and broker Marex Financial
Most recently, on 6 July, Reuters reported that of these 4 additional participants from the Commerzbank / Bank of China / Macquarie / Marex group, the LME has said that only Marex is ready to participate as a “general clearing member”.
Clearing Unallocated into LPMCL
This brings us to the different types of LME clearing members. Of the 6 participants which came on board to LMEprecious in 2016, 4 of these (SocGen, Goldman, Morgan Stanley and ICBC Standard) are General Clearing Members (GCMs) for LMEprecious. However, Natixis is only an Individual Clearing Member (ICM). Furthermore, OSTC is a Non-Clearing Member (NCM). Marex, as mentioned above, is also a General Clearing Members (GCM). See list of GCMs, ICMs and NCMs for LMEprecious here.
According to LME Clear’s membership rules (Rule 3.1 Membership Categories and Application Process):
a “General Clearing Member” or “GCM”, which may clear Transactions or Contracts on its own behalf and in respect of Client Business
an “Individual Clearing Member” or “ICM”, which shall be permitted only to clear Transactions or Contracts on its own behalf
On 6 July, Reuters also reported that an algorithmic trading firm called XTX Markets which is based in Mayfair in London, will also start as a Non-Clearing Member (NCM) participant. Obviously, the Non-Clearing Member (NCM) don’t clear trades, instead they use ‘Administrative clearers’ to do their clearing. XTX will use Marex, and OSTC will use SocGen.
As to why Commerzbank, Bank of China International and Macquarie Bank are still not ready to participate is unclear, but this seems odd given that they announced their intent to participate over 4 months ago.
Meet the New Boss, Same as the Old Boss
– there are now 8 bullion banks, a prop trading firm, and a high speed algo firm lined up to help these LME gold and silver futures get out the gate
– these LMEprecious futures will be trading unallocated gold and unallocated silver.
– unallocated gold and unallocated silver is fractionally-backed paper gold and paper silver
– the 5 LMPCL banks offering these unallocated accounts are HSBC, JP Morgan, UBS, Scotia and ICBC Standard
– the trading of these LMEprecious futures therefore comes full circle and does nothing to change the structure of the London Gold Market or the London Silver Market
– the World (Paper) Gold Council, which claims to promote gold on the behalf of the gold mining industry, is instead front and center in the promotion of more paper gold trading
With similar recently launched London gold futures from CME Group and ICE not having taken off, all eyes will be on these LMEprecious products to see if they can go where no London gold futures have gone before. Therefore, the LME monthly trading volumes page will be one to watch in future.
Whereas some central banks have become more forthcoming on where they claim their official gold reserves are stored (see my recent blog post ‘Central bank gold at the Bank of England‘), many of the world’s central banks remain secretive in this regard, with some central bank staff saying that they are not allowed to provide this information, and some central banks just ignoring the question when asked.
In the ‘Central bank gold at the Bank of England’ article, I said that “A number of central banks refuse to confirm the location of their gold reserves. I will document this in a future posting.” As promised, this blog post explains what I meant by the above statement.
Some of those central banks may have made it into the Bank of England storage list if they had been more transparent in providing gold storage information. However, since they weren’t transparent, these banks make it into the alternative ‘non-cooperative’ list. One subset of this list is central banks, which to be fair to them, did actually respond and said that they cannot divulge gold storage information. The other subset is central banks which didn’t reply at all when I asked them about their official gold storage location details.
The below list, although not complete, highlights 7 central banks and 1 official sector financial institution (the BIS), which, when asked where do they store their gold reserves, responded with various similar phrases saying that they could not provide this information. Between them, these 7 central banks claim to hold 1,500 tonnes of gold. Adding in the BIS which represents another 900 tonnes, in total that’s 2,400 tonnes of gold where the central banks in charge of that gold will not provide any information as to its whereabouts. Much of this 2,400 tonnes is no doubt stored (at least in name) at the FRBNY and the Bank of England, with some stored in the home countries of some of the central banks.
I have included the 8 responses below, but have deleted any references to individuals’ names or email addresses:
Bank of Japan: 765.2 tonnes of gold
Bank for International Settlements (BIS): > 900 tonnes of gold
BIS manages 443 tonnes of gold under custody for central banks
BIS owns 108 tonnes of gold itself
BIS manages 356 tonnes of gold deposits from central banks
BIS has 47 tonnes of gold swaps outstanding
Spain: 281.6 tonnes of gold
South Africa: 125.2 tonnes of gold
Thailand: 152.4 tonnes of gold
Singapore: 127.4 tonnes of gold
Malaysia: 37.9 tonnes of gold
Paraguay: 8.2 tonnes of gold
…which translates into English as …..”That information is classified and cannot be disclosed. I hope you understand“.
‘No Answer’ central banks
I also emailed some central banks which didn’t respond to the question, ‘where are your gold reserves stored?’. They may not have responded for various reasons, including the emails may not have reached the relevant people who would normally be responsible for such matters. These banks account for another 500+ tonnes of gold reserves. Again, some of this gold is probably at the Bank of England, such as, some of Jordan’s and Kuwait’s gold, due to historical ties with the Bank of England.
Banque du Liban (Lebanon): 286.8 tonnes (said to be in Lebanon and FRB New York)
The BIS’ response above on the gold storage question, i.e. “the information that you have requested is not made publicly available” makes a mockery of its own claims in the below slide that central banks are required to be transparent and accountable.
The only ‘gold’ that the BIS is willing to discuss is its pie-in-the-sky corporate-speak ‘Golden Triangle’ of central bank Autonomy complimented by Transparency and Accountability when it states:
– TRANSPARENCY – important for holding central bank to account
- ACCOUNTABILITY – crucial counterpart of autonomy in an open society, makes transparency more credible
(I added the 2 red arrows to the slide to highlight these points)
Conclusion: Finland’s change of heart
The fact that staff of some central banks won’t discuss that bank’s gold storage arrangements is no doubt an internal rule, or a storage depository rule, or some such nonsense. The nonsensical nature of their non-cooperation and evasion is highlighted by the below about-turn from the Bank of Finland, when in January 2013 it childishly told me that “We are not allowed to tell the exact depository, town or country“, and then 9 months later in October 2013, the powers-that-be at the gold depositories gave the go-ahead, for the Bank of Finland then spilled the beans, squealing that its gold was stored at a cornucopia of the usual suspects, namely, the Bank of England, the Federal Reserve Bank of New York, the Swiss National Bank, and smaller amounts at the Swedish Riksbank and the Bank of Finland.
Given that the Bank of England, the Federal Reserve Bank of New York, and the Swiss National Bank all agreed to the Bank of Finland’s request in 2013 to publish the individual storage locations of its gold, and given that the vaults of these 3 banks store the vast majority of internationally stored central bank gold, therefore it also makes a mockery of central banks which persists in claiming that they cannot divulge information on the storage of their own gold, which in most cases is supposedly spread between the very same 3 sets of vaults.
And after the Bank of Finland press release, which most Finns and most of the world probably didn’t even see, Helsinki and the world continued about its business as before. The point being that the storage locations of central banks’ gold reserves is not that big of a deal. Its only the central banks that make it into a big deal with their secrecy….unless of course, they are hiding something bigger, and the gold is not even where its supposed to be.
Each year in June, the Bank of England publishes its annual report which quotes financial data up to the end of February (its financial year-end). The Bank’s annual report also states the amount of gold, valued at a market price in Pounds sterling, that it holds under custody for its customers, which comprise central banks, international financial institutions, and LBMA member banks.
The Bank of England as gold Custodian
In 2014, the Bank of England stated that, as at 28th February 2014, it held gold assets in custody worth £140 billion for its gold account customers, while in 2013, the corresponding figure was £210 billion. In June 2014, Koos Jansen of Bullionstar calculated that the Bank of England therefore held 5,485 tonnes of customer gold at the end of February 2014, and 6,240 tonnes of customer gold at the end of February 2013. This meant that between the two year end dates, end of February 2013 to end of February 2014, the amount of gold in custody at the Bank of England fell by 755 tonnes.
In his personal blog in June 2014, Bron Suchecki of the Perth Mint, also discussed the 2013 and 2014 Bank of England gold custody tonnage numbers, and derived the same 755 tonne drop between February 2013 and February 2014, and he also went back all the way to 2005 and calculated yearly figures for each February year-end from 2005 to 2014. (See table in Bron Suchecki’s blog).
Bank of England gold in custody down another 350 tonnes during 2014
“As of 28 February 2015, total assets held by the Bank as custodian were £514 billion (28 February 2014: £594 billion), of which £130 billion (28 February 2014: £140 billion) were holdings of gold.”
Since 28th February 2015 was a Saturday, the afternoon London Gold Fixing price in GBP on Friday 27th February 2015 was £787.545 per ounce.
£130 billion @ £787.545 per ounce = 5134.37 tonnes = ~ 410,720 Good Delivery bars
This means that between 28th February 2014 and 28th February 2015, the amount of gold stored in custody at the Bank of England fell by another 350 tonnes, from 5,485 tonnes in February 2014, to 5,134 tonnes on 28th February 2015.
Now only 500,000 bars in the entire London vaults system
“In total there is approximately 9,000 tonnes of gold held in London vaults, of which about two-thirds is stored in the Bank of England.”
So that earlier reference would have been (9000 * 0.66) or 6,000 tonnes in the Bank of England and 3,000 tonnes in the other vaults. To summarise:
9,000 tonnes in all London vaults = 720,000 bars
6,000 tonnes in Bank of England (BoE) = about 482,000 bars
3,000 tonnes in London ex BoE vaults = 238,000 bars
7,500 tonnes in all London vaults = ~600,000 bars => lost 120,000 bars (1500 tonnes)
5,625 tonnes in Bank of England = ~ 450,000 bars => lost 32,000 bars (375tonnes)
1,875 tonnes in Ldn ex BoE vaults = ~150,000 bars => lost 88,000 bars (1125tonnes)
Third quotation: June 2015
“There are ~500,000 bars in the London vaults, worth a total of ~US$237 billion”
The London vaults refer to at least the LBMA London vaults, and may include other non-LBMA gold vaults in London, depending on how the LBMA collected these figures from the vault operators. Apart from the Bank of England gold vaults, the LBMA ‘London’ vaults, are the vaults of JP Morgan and HSBC Bank in the City of London, the vaults of Brinks, Malca Amit and Via Mat (Loomis) out near Heathrow, and the vault of G4S in Park Royal, and not to forget the Barclays vault which is run by Brinks.
In the cases of the 9,000 tonnes and 7,500 tonnes quotations, the tonnage figures and the fractions are probably rounded to an extent for simplicity, so are ballpark figures, but a comparison between the two earlier quotations indicates that the Bank of England lost 375 tonnes, and the rest of the London vaults lost 1,125 tonnes. In total that’s 1,500 tonnes less gold in London between the time the first figure was complied and the time the updated (second) figure was published.
Factoring in the “There are ~500,000 bars in the London vaults, worth a total of ~US$237 billion“ quotation, which equates to 6,250 tonnes, this means that another 1,250 tonnes of gold (approximately 100,000 Good Delivery bars) has now gone from the London gold vaults compared to when there was 7,500 tonnes of gold in the London vaults, as quoted on the vaulting page of the LBMA’s web site as recently as earlier this year.
A total of 6,250 tonnes is also 2,750 tonnes (about 220,000 Good Delivery bars) less than the 9,000 tonnes quoted on the LBMA web site in April 2014, which may have referred to a period earlier than 2014.
All of the gold in the Bank of England would be London Good Delivery bars (i.e. variable weight bars each weighing about 400 oz or 12.5kgs), and most, if not all, of the gold in the other London vaults would also be London Good Delivery bars, because importantly, all the gold held by the ETFs in London, primarily the SPDR Gold Trust at the HSBC vault in London, is required by the ETF prospectuses to be in the form of London Good Delivery gold bars.
In fact, Stewart Murray, the then CEO of the LBMA stated at a presentation held in Paris in November 2011 that the gold in the London vaults was “Virtually all in the form of Good Delivery bars”, although by August 2015, a very recent presentation (slow file to load) by current LBMA CEO Ruth Crowell in Goa India, stated that, in the London gold market, “Almost all gold is held in the form of Good Delivery bars“.
Symantics maybe between ‘virtually‘ and ‘almost all‘, but there are probably some kilobars held in the London gold vaults now that might not have been as common in 2011. Note that the LBMA and the Shanghai Gold Exchange recently executed a mutual recognition agreement for a 9999 gold kilobar standard, so each body now recognises the kg bars manufactured by all of the gold refiners that each body has accredited.
The LBMA has also recently made reference to a potential 995 gold kilobar standard which it has referred to as a ‘draft for discussion and possible endorsement”. See the Goa presentation from Ruth Crowell, above.
What time period did 9,000 tonnes refer to?
LBMA launched a new version of its website in approximately March 2014. It’s not clear what exact month this 9,000 tonnes of gold in the London vaults figure refers to, but a lot of the text on the new LBMA website in 2014 was already on the previous version of the website prior to the revamp, so the tonnages specified on the new website in April 2014 could have been on the previous version of the website before April 2014 and merely been copied across to the new website. However, there is a way to infer the latest date at which the 9,000 tonne figure could have been referring to.
“At our premises at Threadneedle Street, London, we have approximately £200 billion worth of gold stored over 10 vaults.”
On 11th March 2013, the GBP price for an ounce of gold was £1059 (average of AM and PM fixes in Sterling). At £1059 per oz, $200 billion of gold is 188,857,412 ounces, or 5,874 tonnes, or about 469,940 Good Delivery bars.
Recalling the two totals discussed above at the Bank of England of 6,000 tonnes and 5,625 tonnes, this 5,874 tonnes figure is quite close to being halfway between 6000 and 5625 (i.e. 6000 + 5625 / 2 = 5812.5 tonnes). So its realistic to assume that Luke Thorn’s number lay somewhee in time between the two LBMA quotations, and that therefore, the 6,000 tonnes total at the Bank of England, and by extension the 9,000 tonne total in all London vaults, most likely referred to the state of the London gold market before 11 March 2013.
In other words, the 9,000 tonnes in the London vaults, and the 6,000 tonnes in the Bank of England, were referring to the amount of gold in the London vaults before the major drop in the gold price in April 2013 and June 2013, and before the huge 2013 withdrawals of gold from the gold ETFs which store their gold in London, and before most of the 755 tonnes of gold was withdrawn from the Bank of England (BoE) between 28th February 2013 and 28th February 2014.
Only 90,000 Good Delivery bars outside BoE vaults – this includes all London ETF gold
If there are now only 500,000 Good Delivery bars in the London vaults, as LBMA CEO Ruth Crowell’s presentation of June 2015 states, then with 410,000 Good Delivery gold bars in the Bank of England vaults (5,134 tonnes from 28th February 2015), then there are only 90,000 Good Delivery gold bars in the other London gold vaults, which is 1,125 tonnes.
Not only that, but nearly all of this 1,125 tonnes in the other London vaults is gold belonging to the physical gold-backed ETFs which store their gold in London. The ETFs that store their gold bars in London are as follows:
(Note: PHAU and PHGP are the same ETF. They are just two ISINs of the same underlying ETF. PHAU is in USD, PHGP is in GBP. The same structure applies to the other ETF Securities ETF known as GBS. GBS and GBSS are the same ETF. GBS is the USD ISIN and GBSS is the GBP ISIN).
The SPDR Gold Trust (GLD) currently holds 682 tonnes of gold in the vault of HSBC in London. That leaves only 443 tonnes of gold from the 1,125 tonnes above that is not in the GLD.
The iShares Gold Trust (IAU) gold is held in 3 vaults in 3 countries, namely the JP Morgan vault in London, the JP Morgan vault in New York, and the Scotia vault in Toronto. On the surface, this is an unusual vaulting arrangement for IAU. This arrangement just arose due to the way the IAU prospectus was worded in 2004, and the way the original iShares Gold Trust custodian, Scotia Mocatta, stored the gold in London, New York and Canada. JP Morgan took over as custodian for IAU in the second half of 2010, and just maintained this 3 vaults in 3 countries arrangement for whatever reason. Some of the Authorised Participants of IAU include Barclays, Citibank, Credit Suisse, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley, Scotia, and UBS.
In the JP Morgan vault in London, IAU currently holds 7,265 Good Delivery gold bars (2.907 million ounces), which is 90 tonnes. That leave only 353 tonnes in the London vaults, that is not at the Bank of England, not in the SPDR Gold Trust, and not in the iShares Gold Trust.
As of 3rd September 2015, the ETFS Physical Gold ETF (PHAU)held 3,271,164 troy oz of gold in London at HSBC’s vault. That’s 101.7 tonnes in PHAU, which leaves only 251 tonnes unaccountedfor in the London vaults.
There is also another ETFS physical gold ETF called Gold Bullion Securities (GBS) which also holds its gold in the HSBC London vault. As of 3rd September 2015, GBS held 2,233,662 troy oz of gold. That’s 69 tonnes. Subtracting this 69 tonnes from the residual 251 tonnes above, leaves only 182 tonnes of unaccounted for gold in the London vaults.
Some of the Authorised Participants of the ETFS ETFs are Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Merrill Lynch, Morgan Stanley, Scotia, and UBS.
The ‘Source Physical Gold ETC (P-ETC)‘ also stores its allocated gold in the JP Morgan vault in London. This gold is held for the trustee Deutsche Bank by the custodian JP Morgan Chase. The Authorised Participants for this Source ETC are Goldman Sachs, JP Morgan, Bank of America, Morgan Stanley, Nomura and Virtu Financial. According to a Source gold bar list dated 28th August 2015, the Source Physical gold ETC held 1.571 million fine ozs of gold in bars that weighed 1.574 million gross ozs, so that’s about 3,925 Good Delivery bars, which is about 49 tonnes.
Subtracting this 49 tonnes from the remaining 182 tonnes above, which are not held within the Bank of England, and which are not held by the other physically backed gold ETFs described above, leaves only 133 tonnes of unaccouted for gold in the London vaults.
Other companies store some of their customer gold in the London vaults, such as GoldMoney and BullionVault. Based on its daily update, BullionVault had 6709 kgs of gold, or 6.7 tonnes, stored in London, while GoldMoney, based on an audit from 1st December 2014, had 410 Good Delivery bars, or about 5.14 tonnes, stored in Via Mat’s (Loomis) London vault. Combined, that’s another ~14 tonnes of gold which can be substracted from the 133 tonnes above, leaving only 119 tonnes that is not accounted for.
To put a figure such as 119 tonnes of gold into perspective, this is about the same amount as 1-2 weeks worth of gold withdrawals from the Shanghai Gold Exchange, or about 1 month’s worth of official gold imports into India.
Unallocated Musical Chairs, without any chairs
In a May 2011 presentation at the LBMA Bullion Market Forum in Shanghai, while discussing London gold vaults, former LBMA CEO Stewart Murray had a slide which read:
Investment – more than ETFs
Gold Holdings have increased by ~1,800 tonnes in past 5 years, almost all held in London vaults
Many thousands of tonnes of ETF silver are held in London
Central banks hold large amounts of allocated gold at the Bank of England
Various investors hold very substantial amounts unallocated gold and silver in the London vaults
There are 2 interesting things about the above slide. If central banks ‘hold largeamounts of allocated gold at the Bank of England”, which totalled 6,000 tonnes and then 5,625 tonnes, and more recently 5,134 tonnes, and if this is a proxy for an amount being ‘large’, then the 2nd statement with the quantum “very substantial amounts’ and especially the qualifier ‘very’, implies that the unallocated amounts represent larger amounts than the ‘allocated’ amounts, perhaps ‘very’ much larger amounts.
That 2nd statement is also a contradiction in terms. Unallocated gold is not necessarily held in vaults or held anywhere. Unallocated is just a claim against the bank that the investor holds an unallocated gold account with. There are no storage fees on an unallocated gold account in the London Gold Market precisely because one cannot charge a storage fee when there is not necessarily anything being stored.
So the ‘very substantial amounts‘ being held really means that investors have very substantial amounts of claims against the banks which offer the unallocated gold accounts, or in other words, the banks have very substantial liabilities in the form of unallocated gold obligations to the gold account holders. As to how much physical gold is on the balance sheets of the banks to cover these liabilities, if the figure of 500,000 bars in the entire set of London vaults is accurate, then there is hardly any gold in London to cover the unallocated gold accounts.
LBMA Member gold accounts at the Bank of England
A 2014 quarterly report of the Bank of England said that 72 central bank customers (including a smaller number of official sector financial organisations) held gold accounts with the Bank of England. That reference is on page 134 of the report, however, a small subset of the report, including page 134 can be viewed here (and is not a large file to download).
“The Bank of England acts as gold custodian for about 100 customers, including central banks and international financial institutions, LBMA members and the UK government.”
If central bank customers with gold accounts, whose numbers would not change that much from 2011 to 2014, represented ~72 gold accounts, that would mean that up to 28 LBMA members could have gold accounts at the Bank of England.
Is that number of LBMA member bullion banks a feasible number for maintaining a gold account at the Bank of England? Yes it is, primarily because of the gold lending market, but also due to the way the London gold clearing market works.
Bolivia’s gold and the Bullion Banks
Just as an example, the Central Bank of Bolivia’s gold that it lent to bullion banks in 1997 and that has never been returned to the Central Bank of Bolivia, has gone through the hands of at least 28 bullion banks between 1997 and the present day. These entities, some of which have merged with each other (*), and a few of which imploded, include Swiss Bank Corp*, Republic National Bank of New York*, Midland Bank (Montagu)*, Credit Suisse, SocGen, Natixis, BNP Paribas, Standard Chartered, ANZ, Scotia Mocatta, Barclays, Morgan Stanley, HSBC, Macquarie, Deutsche, Dresdner*, Bayerische Landesbank, Westdeutsche Landesbank*, JP Morgan*, Commerzbank*, Citibank, Rabobank, Morgan Guaranty* and Bayerische Vereinsbank. The IBRD (World Bank) even took on to its books the borrowed gold positions of the bullion banks during the financial crisis in 2009 because it had a higher credit rating than the investment banks after the Lehman crisis.
The lent gold of Central American banks during the 2000s, such as the gold of Guatemala, El Salvador, Honduras and Nicaragua, had been on the books of additional banks Mitsui & Co, J Aron (Goldman), Mitsubishi, AIG, and N.M. Rothschild. Bullion banks ebb and flow as to their involvement in the gold market, and some merge and go bust or get forceably rescued and shoved together, but a lot of other banks are also LBMA members that are not in the aforementioned names, such as RBC, ICBC Standard Bank, Toronto Dominion Bank, Merrill Lynch and Zurcher Kantonalbank, not to mention the other Chinese and Russian bank members of the LBMA. So overall, it is quite conceivable that 28 LBMA member bullion banks each have a gold account at the Bank of England.
How much gold did the London-based gold ETFs lose in 2013
The year 2013 was a year of huge gold outflows from the gold backed ETFs. Of the ETFs based in London, or more correctly, the ETFs with gold stored in London, the gold outflows were as follows:
The SPDR Gold Trust had an outflow of 561 tonnes of gold in 2013. It started 2013 holding 1,349 tonnes of gold, and ended 2013 with 798 tonnes. At the end of March 2013, GLD held 1,221 tonnes, at the end of Q2 it held less than 1000 tonnes (passing through the 1000 tonne barrier on 18th June 2013. By the end of Q3 2013 (actually on 2nd October 2013) GLD held 900 tonnes. Then by the end of 2013 its gold holdings dipped below 800 tonnes. During 2014, GLD lost another 80 tonnes, taking it to 709 tonnes at December month-end 2014.
In Q2 2013, GLD was hammered. Its gold holdings went from 1,221 tonnes to 1078.5 tonnes in April, a loss of 143 tonnes, then down to 1,013.5 tonnes at the end of May, another 62 tonnes loss, and by the end of June it held 969.5 tonnes, a June loss of 43.5 tonnes. Overall in Q1 2013, GLD lost 128 tonnes, then 249 tonnes in Q2 (and 379 tonnes in H1), then 100 tonnes in Q3, and another 100 tonnes in Q4 2013 (200 tonnes in H2). The near rounded 100 tonne withdrawals from GLD in both Q3 and Q4 2013 are uncanny. As if someone said “let’s take another 100 tonnes out of GLD this quarter”.
The iShares Gold Trust (IAU) lost approximately 60 tonnes of gold in 2013. Assuming the mix of IAU gold holdings in 2013 across London, New York, and Toronto was the same as it is now (i.e with 56% of the gold in London, 41% in New York, and 3% in Toronto, then IAU would have lost about 34 tonnes from London. More of the IAU gold probably flowed out of the JP Morgan’s London vault in 2013 than the other IAU storage locations, because London is the world’s main gold market for Good Delivery bars, and furthermore, that is where the gold.
ETF Securities’ PHAU lost 52 tonnes in 2013. ETS Securities GBS ETF lost 42 tonnes. The ‘Source’ Gold ETF lost 31 tonnes.
The above shows that (561 + 34 + 52 + 42 + 31) = 720 tonnes of gold was withdrawn from London gold vaults in 2013 via ETF gold redemptions. About 880 tonnes of gold in total was withdrawn from gold backed ETFs in 2013 but some of this was from ETF’s based in Switzerland and elsewhere.
Remember that the only entities which can usually redeem gold from gold backed ETFs are the Authorised Participants (APs), which in nearly all cases are the same banks as act as custodians or sub-custodians for those ETFs, and these are also the same banks that either have vaults in London or that have vaulting facilities in London, and these banks are also in a lot of cases members of the private gold clearing company London Precious Metals Clearing Limited (LPMCL) and lastly, these banks all hold gold accounts at the Bank of England.
Can ETF gold, such as GLD gold, be held in the Bank of England vaults?
Recalling that the amount of gold withdrawn from the Bank of England between 28th February 2013 and 28th February 2014 was 755 tonnes, can any of the gold that was withdrawn from the ETFs in 2013 have been the same gold that was in these the Bank of England withdrawals in 2013?
The answer is that technically, it can’t be the same gold because the ETFs are supposed to store their gold at the vault premises of the specified custodian. ETF gold can be stored at a vault of a sub-custodian, but has to be physically transferred to the vault of the custodian using “commercially reasonable efforts”.
“Custody of the gold bullion deposited with and held by the Trust is provided by the Custodian at its London, England vaults. The Custodian will hold all of the Trust’s gold in its own vault premises except when the gold has been allocated in the vault of a subcustodian, and in such cases the Custodian has agreed that it will use commercially reasonable efforts promptly to transport the gold from the subcustodian’s vault to the Custodian’s vault, at the Custodian’s cost and risk.”
The subcustodians that the SPDR Gold Trust currently uses (and that it used during 2013) are “the Bank of England, The Bank of Nova Scotia-ScotiaMocatta, Barclays Bank PLC, Deutsche Bank AG, JPMorgan Chase Bank and UBS AG.”
These banks, along with HSBC, but excluding Deutsche Bank, are the 5 members of London Precious Metals Clearing Limited (LPMCL). (Although the GLD Sponsor might want to think about deleting Deutsche Bank from the list).
Shockingly, the GLD Prospectus also says that:
“In accordance with LBMA practices and customs, the Custodian does not have written custody agreements with the subcustodians it selects.”
The GLD prospectus goes on to explain that LBMA custodians are obliged to provide gold holder entities with details (including locational details) of the gold that they or their subcustodians hold on behalf of a relevant entity gold holder that enquires, but this is just based on “LBMA practices and customs”. It also states:
” Under English law, unless otherwise provided in any applicable custody agreement, a custodian generally is liable to its customer for failing to take reasonable care of the customer’s gold and for failing to release the customer’s gold upon demand.”
Coming from a background of equity and bond portfolio management, I find the fact that there are no custody agreements with the GLD gold subcustodians very odd. Custodians of financial assets such as Citibank, PNC, Northern Trust, and State Street, would all insist on having custody agreements with each other when appointing sub-custodians. To organise it in any other way is crazy.
This is something that GLD institutional and hedge fund investors should enquire about with World Gold Trust Services (the SPDR Gold Trust Sponsor) when performing their next set of due diligence exercises on the GLD, just to make sure they understand how the sub-custodian arrangements work. It does look like the gold in the LBMA system is acting like one big happy pool of gold..like the 1960s London Gold Pool.
All of the GLD annual and quarterly filings for 2013 and every year state, in the ‘Results of Operations” section, that “As of [Date], Subcustodians held nil ounces of gold in their vaults on behalf of the Trust.” For example:
“As at September 30, 2013, subcustodians held nil ounces of gold in their vaults on behalf of the Trust.”
The same is true for December 31, June 30, 2013, and March 31, 2013. The annual full gold bar audit undertaken on the SPDR Gold Trust would also suggest that no GLD gold is stored at sub-custodians, including the Bank of England. For example in the full 2013 GLD gold bar audit (click the exact link here -> //www.spdrgoldshares.com/media/GLD/file/Inspectorate_Certificate_Aug30_2013.pdf), it states that the location of the audit was the “London Vaults of HSBC Bank USA National Association“:
“We performed a full count of 77,709 bars of gold, based upon the gold inventory as at 28th June 2013, between 8th July and 29th August 2013 at the Custodian’s premises”
The bars were described as “77,709 London Good Delivery, large Gold Bars”. There is also a separate partial audit on the GLD gold bars each year. The earlier partial audit of GLD in March 2013 stated that there was a random audit of the “105,840 London Good Delivery, large Gold Bars” held by the GLD “based upon the gold inventory as at 22nd February 2013, between the 4th March and 15th March“. This audit was also specified as occurring at the “London Vaults of HSBC Bank USA National Association”.
Although I don’t think the HSBC London vault was big enough to store all the GLD gold during 2013 when it held up to 1353 tonnes, as well as storing the ETFS Securities gold and other HSBC customer gold , the GLD audits and SEC filings seem to indicate that all the GLD gold was at the HSBC London vault.
Incidentally, the ETF Securities gold ETFs which also use HSBC as custodian, specify a list of subcustodians that includes the commercial security companies Brinks, Malca Amit and Via Mat (Loomis) in addition to the LPMCL members:
“The Bank of England, The Bank of Nova Scotia (ScotiaMocatta), Deutsche Bank AG, JPMorgan Chase Bank, N.A., UBS AG, Barclays Bank PLC, Brink’s Global Services Inc., ViaMat International and Malca-Amit Commodities Ltd.”
As the Perth Mint’s Bron Suchecki pointed out in his personal blog in June 2014, central banks were net buyers of gold during 2013, not net sellers, so it appears that it was LBMA member banks with gold accounts at the Bank of England that were withdrawing gold bars from the Bank of England during 2013. Even the gold repatriated by the Central Bank of Venezuela in late 2011 and early 2012 appears to have been flown to Caracas from France and not from the Bank of England.
From March 2006 until February 2011, the amount of gold stored in custody at the Bank of England’s gold vaults rose by 2,065 tonnes (See Bron Suchecki’s table at the previous link). It then dipped by 68 tonnes from March 2011 to February 2012 before rising by another 722 tonnes from March 2012 to February 2013. That was a net 2,719 tonnes increase from March 2006 to February 2013. What percentage of this increase in custody gold holdings at the Bank of England was delivered by central bank customers and what percentage was delivered by LBMA bullion bank customers is unclear.
Then, as mentioned above, 755 tonnes of gold was withdrawn from the Bank of England between March 2013 and February 2014, and 355 tonnes withdrawn from March 2014 to February 2015.
If the ~720 tonnes of gold withdrawn from the gold backed London-based ETFs is not the same gold as was withdrawn from the Bank of England, then this means that (720 tonnes + 755 tonnes) = 1475 tonnes of London Good Delivery bars came out of the London market in 2013.
Which is very interesting, because the UK exported approximately 1,400 tonnes of gold to Switzerland during 2013 (Eurostat – HS Code 7108.1200 “Unwrought Gold” – Source www.sharelynx.com).
“Australian bank Macquarie, citing trade data from EU statistics agency Eurostat, said the UK exported 1,739 tonnes of gold in 2013, with the vast majority sent to Switzerland.”
There is a possibility, as Bron Suchecki mentioned, that some of the Authorised Participants (APs) of the gold ETFs, which have gold accounts at the Bank of England, redeemed ETF shares for gold held at the London vaults of JP Morgan and HSBC, and that HSBC or JP Morgan transferred gold from their own accounts at the Bank of England to the gold accounts of the APs at the Bank of England, who then withdrew it.
But with over 1,400 tonnes of gold withdrawn from the London gold market in 2013 (since 1400 tonnes of gold was transported from the UK to Switzerland), this suggests that the gold that went to Switzerland in 2013 was in the form of Good Delivery bars from both the London based gold ETFs vaults (HSBC and JP Morgan), and from the Bank of England vaults.
If the calculations above are correct about the 500,000 Good Delivery bars in the London vaults whittling down to about 130 tonnes of gold that’s not accounted for by ETFs and other known gold holders, and that’s not accounted for by the Bank of England vault holdings, then there is surely very little available and unencumbered gold right now in the London Gold Market.
“The cost of borrowing physical gold in London has risen sharply in recent weeks. That has been driven by dealers needing gold to deliver to refineries in Switzerland before it is melted down and sent to places such as India, according to market participants.”
“‘[The rise] does indicate that there is physical tightness in the market for gold for immediate delivery’, said John Butler, analyst at Mitsubishi.”
And it begs the question, why do the dealers need to borrow, and who are they borrowing from. And if the gold is being borrowed and sent to Swiss refineries, and then shipped onward to India (and China), then when will the gold lenders get their gold back?
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